If HBO execs thought Tony Soprano (a.k.a. actor James Gandolfini) was a ruthless negotiator, they may be surprised when they face an even bigger tough guy in Brian L. Roberts, the lanky chief executive of Comcast Corp. (CMCSK ) Roberts' Philadelphia-based company became the nation's largest cable operator in November when it closed on its $54 billion deal to buy AT&T's (T ) cable operation. Now, judging from complaints from several cable channels, Comcast is starting to throw its weight around.
With control over 21 million cable homes (roughly one in every five TV homes), Roberts is starting to put the screws to programmers, say industry observers. BusinessWeek has learned that in recent months, he has begun to press HBO, Lifetime, and others to cut the fees Comcast must pay to carry their channels. Roberts is under pressure to whittle away at the company's postmerger debt load of nearly $30 billion, and the cable giant is facing a 25% rise by 2006 in programming costs alone, to $5 billion -- as everyone from ESPN to USA Network plans to hike per-subscriber monthly fees. In facing down programming moguls in Hollywood and New York, Comcast would also be striking a blow for other distributors. In an industry in which content has long been king, it could be a turning point. "I'm all for what Comcast can do," says James O. Robbins, CEO of Cox Communications Inc. (COX ), the country's No. 4 cable operator. "Somebody has to right the balance."
Comcast and HBO have been tensely negotiating a new agreement for months, with Comcast refusing to give the AOL Time Warner Inc. (AOL ) channel the 10% hike it has been seeking as it ramps up original programming with new upcoming shows like the western Deadwood and Dust Bowl era circus drama Carnivale. HBO executives declined to comment. Price hikes put cable companies like Comcast in a bind: It currently pays HBO as much as $6 for each subscriber who gets HBO, but it's wary of raising its rates for consumers for fear of prompting defections to satellite. "There's a delicate balance, certainly, but at this size, Comcast has the ability to alter the economic model of programmers by refusing to carry their channels," says Aryeh Bourkoff, an analyst at UBS Warburg.
Comcast quickly took up the cause following the Nov. 18 acquisition of AT&T Broadband, which catapulted the medium-size company into first place. (Comcast previously had 8 million subscribers.) Over the past several months, it has been reviewing AT&T's existing agreements with programmers -- and is finding that, although AT&T had more subscribers, it overpaid, relative to Comcast's contracts. Now Comcast will try to enforce the less expensive contracts companywide -- or push for even better rates. "We are negotiating with programmers on a case-by-case basis. Comcast is only exercising its rights under previously negotiated contracts," a company spokeswoman says. Comcast could save as much as $135 million this year by "cherry-picking" the best deals and by negotiating discounts, according to Merrill Lynch & Co. It's all making cable programmers nervous. "They're the 800-pound gorilla," says one cable channel executive. "And we're waiting to see what they do to us next."
Roberts launched the fee offensive the same day the Comcast-AT&T deal closed. The newly merged company sued to negate AT&T's deal with premium movie service Starz Encore, owned by Liberty Media Corp. (L ) The idea was to replace it with Comcast's less costly agreement, potentially saving it $80 million this year, according to filings from Liberty. Comcast has also apparently balked at striking a new deal with AOL Time Warner's TNT channel, which has been asking operators for a 9% fee increase to help offset the costs of its new National Basketball Assn. contract. Comcast continues to carry TNT without a new deal -- the only cable operator that hasn't paid up.
The soaring cost of sports programming is perhaps the most contentious issue between programmers and cable and satellite companies. ESPN is the most expensive basic cable channel (on average, it charges $1.81 per subscriber a month) and often demands annual fee increases of 15% to 20%. Cable operators are hoping Comcast can swing back the pendulum.
The issue of rising cable prices, meanwhile, is on Congress' radar screen. Often the target of politicians' wrath, cable operators have managed to deflect some criticism this time around. The industry recently won support from Senator John McCain (R-Ariz.), chairman of the Senate Committee on Commerce, Science & Transportation, for an à la carte system, in which consumers could pay for individual channels rather for entire tiers of service. That's what Long Island (N.Y.) operator Cablevision Systems (CVC ) negotiated recently with the Yankees Entertainment & Sports network after refusing to carry YES last season. YES wanted $2 per subscriber a month and to be carried as part of a basic offering. Under a new interim deal, YES will be offered to Cablevision customers with two other sports channels for an extra charge of $4.95 a month.
One irony is that cable operators are inadvertently aided in the fight against high rights fees by their fast-growing satellite rivals, DirecTV (GMH ) and Echostar Communications (DISH ). The two services have a total of 19 million subscribers, which adds to the overall leverage over pricing. In the constant battle between owners of distribution and content, control may once again be shifting.
By Tom Lowry in New York and Ronald Grover in Los Angeles